supply and demand
KrugMicro2eMods_Mod07_Layout 1 3/21/11 2:08 PM Page 71
What you will learn in this Module:
Module 7
Supply and Demand:
Changes in Equilibrium
•
How equilibrium price and quantity are affected when there is a change in either supply or demand
•
How equilibrium price and quantity are affected when there is a simultaneous change in both supply and demand
Changes in Supply and Demand
The emergence of Vietnam as a major coffee-producing country came as a surprise, but the subsequent fall in the price of coffee beans was no surprise at all. Suddenly, the quantity of coffee beans available at any given price rose—that is, there was an increase in supply. Predictably, the increase in supply lowered the equilibrium price.
The entry of Vietnamese producers into the coffee bean business was an example of an event that shifted the supply curve for a good without affecting the demand curve.
There are many such events. There are also events that shift the demand curve without shifting the supply curve. For example, a medical report that chocolate is good for you increases the demand for chocolate but does not affect the supply. That is, events often shift either the supply curve or the demand curve, but not both; it is therefore useful to ask what happens in each case.
We have seen that when a curve shifts, the equilibrium price and quantity change.
We will now concentrate on exactly how the shift of a curve alters the equilibrium price and quantity.
What Happens When the Demand Curve Shifts
Coffee and tea are substitutes: if the price of tea rises, the demand for coffee will increase, and if the price of tea falls, the demand for coffee will decrease. But how does the price of tea affect the market equilibrium for coffee?
Figure 7.1 on the next page shows the effect of a rise in the price of tea on the market for coffee. The rise in the price of tea increases the demand for coffee. Point E1 shows the original equilibrium,
What you will learn in this Module:
Module 7
Supply and Demand:
Changes in Equilibrium
•
How equilibrium price and quantity are affected when there is a change in either supply or demand
•
How equilibrium price and quantity are affected when there is a simultaneous change in both supply and demand
Changes in Supply and Demand
The emergence of Vietnam as a major coffee-producing country came as a surprise, but the subsequent fall in the price of coffee beans was no surprise at all. Suddenly, the quantity of coffee beans available at any given price rose—that is, there was an increase in supply. Predictably, the increase in supply lowered the equilibrium price.
The entry of Vietnamese producers into the coffee bean business was an example of an event that shifted the supply curve for a good without affecting the demand curve.
There are many such events. There are also events that shift the demand curve without shifting the supply curve. For example, a medical report that chocolate is good for you increases the demand for chocolate but does not affect the supply. That is, events often shift either the supply curve or the demand curve, but not both; it is therefore useful to ask what happens in each case.
We have seen that when a curve shifts, the equilibrium price and quantity change.
We will now concentrate on exactly how the shift of a curve alters the equilibrium price and quantity.
What Happens When the Demand Curve Shifts
Coffee and tea are substitutes: if the price of tea rises, the demand for coffee will increase, and if the price of tea falls, the demand for coffee will decrease. But how does the price of tea affect the market equilibrium for coffee?
Figure 7.1 on the next page shows the effect of a rise in the price of tea on the market for coffee. The rise in the price of tea increases the demand for coffee. Point E1 shows the original equilibrium,